1. Field of the Invention
The present invention relates generally to methods of doing business and, more specifically, to a method of evaluating long-term average portfolio risk and return for a cyclical corporation.
2. Description of the Related Art
It is known to evaluate long-term risk versus return for a portfolio of financial instruments such as bonds of a cyclical corporation. One typical approach is to take a series of different unchanging bond portfolios and evaluate their average risk and return over some historical period. From these calculations, each portfolio's position on a risk versus return graph is plotted and an “efficient frontier” line of best portfolios is selected. This approach suffers from the disadvantage in that it is assumed that the investor has the same amount of money or cash holdings on hand to invest each segment. This is certainly true for a wide class of investors, but is clearly not the case for a cyclical corporation which will tend to have wide swings in the amount of corporate cash holdings on hand during given market periods. This is essential for doing the correct analysis for a cyclical corporation, because a higher return when the corporation is likely to have little cash is of little benefit. Simply using a constant level of cash, as is typically done, runs the risk of overstating the average return of such a portfolio for a given level of risk. Furthermore, this distinction is expected to make a difference since the cyclical corporation's cash balance is generally tied to the overall performance of the economy, and the performance of the bond market is also tied to the overall performance of the economy.
As a result, it is desirable to provide a method of evaluating long-term average portfolio risk and return for a cyclical corporation. It is also desirable to provide a method that includes the actually observed or expected cyclical cash levels of a corporation into the usual “constant cash” method for evaluating long-term historical risk versus return prospects for portfolios of financial instruments. It is further desirable to provide a method that can be used for both bond and stock portfolios and other sorts of portfolios consisting of financial instruments. It is still further desirable to obtain an unbiased long-term evaluation of the risk and return of a particular strategy for the bond portfolio for a cyclical corporation.